Understanding the EIS Tax Rebate

What is an EIS Tax Rebate?

An Enterprise Investment Scheme tax rebate allows investors to claim back a portion of income tax. Better yet, you can claim tax relief on your income tax bill regardless of when you invested during the current tax year. 

How much income tax relief are investors eligible for? It’s possible to reclaim up to 30% of your investment amount as a rebate on the income tax paid that same year.

As long as your EIS investment qualifies for the scheme and you meet its criteria, this tax relief applies whether you apply at the start, during the tax year, or at the end. 

That’s not all. The EIS scheme incentivises investors with a variety of other tax reliefs. For one, investing in an EIS company allows you to claim capital gains deferral relief should the investment prove successful.

Additionally, your investment is given inheritance tax relief, while an unsuccessful investment is mitigated via loss relief. 

The Main Benefits of Income Tax Relief

Below, we examine the core tax relief benefits investors can receive by taking the chance with an EIS investment. 

30% Income Tax Relief

One of the most significant advantages of making an EIS-qualifying investment is the 30% of the money invested you can claim back on your income tax bill. This income tax relief makes the Enterprise Investment Scheme attractive to investors, especially those who want to support innovative UK businesses.

Let’s use an example to show investors how beneficial income tax relief can be:

If you invested £60,000 by purchasing EIS-qualifying shares, you could claim income tax relief of up to £18,000. It effectively reduces your taxable income, allowing you to keep more of your earnings. 

While taking advantage of that substantial relief on your tax liability, you can also help support the UK economy and the growth of the company you have invested in. 

Capital Gains Tax Relief

Another significant incentive the UK-backed Enterprise Investment Scheme offers is the ability to defer capital gains tax (CGT).

In any normal circumstances, you’re required to pay a capital gains tax of 18% or 24% (depending on your tax rate) on any gains made from selling assets such as property or shares. 

Investing those gains into an EIS company provides deferral relief on those gains. You’ll not have to pay CGT until you sell the EIS shares. You can even reinvest any gains from those shares to continue to defer that tax bill. This provides more flexibility in tax planning and allows you to use taxed money to potentially make additional returns.

Let’s use another example:

If you sold a property and made gains of £100,000, you’re liable for capital gain tax of £18,000 or £24,000, depending on your tax bracket. Investing that gain into an EIS-qualifying company will defer that tax liability. 

This capital gains deferral relief helps you take control of your cash flow, giving you the flexibility to reinvest in other ventures or preserve liquidity for future opportunities. Adding to this, it supports strategic financial planning by allowing you to manage and optimise your tax benefits over the long term. 

Capital Gains Tax Exemption

That’s not all. Any gains you make as a result of selling your EIS shares are exempt from CGT. The only condition is that you held the shares for at least three years from the purchase. 

This exemption is easily one of the most attractive incentives for investors. Essentially, if your EIS investment proves successful, you reap the rewards of the gains made and avoid having to pay CGT at the same time.

Imagine the feeling of investing £50,000 in a smaller UK company that grows significantly over three years, and your shares triple in price. The significant £100,000 gain is already cause for celebration, but your profits are boosted further thanks to avoiding an £18,000 or £24,000 tax bill on that gain. 

An added bonus is that you’ve helped a young company grow during its early years while aiding the UK economy at the same time.

EIS Loss Relief

There is a reason the UK government offers incentives via the EIS scheme. The companies that benefit from the investment are smaller companies, and therefore, they are at greater risk of failure. 

That makes any investment risky. While the tax benefits already detailed are good reasons to consider the scheme, investors primarily benefit if the investment proves successful. However, there’s also some protection should an investment fail.

If the investment does not go as planned, EIS loss relief mitigates some of the pain. Should you sell EIS shares at a loss, those losses can be offset against your capital gain or income tax. 

Using the earlier £50,000 investment as an example. Should it go south, and you’ve made a £20,000 loss after claiming all other tax relief, you could receive 20% or 45% of those losses back, depending on your tax band. In the higher bracket, you can claim EIS loss relief of £9,000. That effectively halves your losses. You’re still down £11,000, but it could have been twice as much. 

Essentially, loss relief acts as a safety net that mitigates some of the risk you’re taking when investing in early-stage businesses. 

Inheritance Tax Relief

The final EIS tax relief may not benefit you directly, but it will certainly benefit the person who inherits your investment. As long as you held the Enterprise Investment Scheme shares for at least two years, they’re exempt from inheritance tax should you pass. 

40% inheritance tax is applied to the value of any assets above a £325,000 threshold. Therefore, using a good financial and asset management strategy will allow you to transfer your wealth tax efficiently. Investors can use the Enterprise Investment Scheme to ensure a smaller tax burden for the beneficiaries they want to pass down to. 

How to Claim Income Tax Relief

Claiming EIS tax relief isn’t as difficult as you might think. Assuming you’ve received your EIS certificate following making an EIS investment, you can claim EIS tax relief via your self-assessment tax return.

There are two EIS certificates. 

One is an EIS3, which is issued if the company you’ve bought shares from is currently unapproved for the EIS fund, but the application is ongoing. With the certificate, the tax year of your claim is based on the date your shares were issued to you.

The second is an EIS5. This form is issued if the company is approved for the scheme. With this form, your tax relief comes into play once you’ve sold the company shares after holding them for a minimum of three years. 

Alternatively, you can claim relief for the current year if your tax is paid via PAYE. You just have to adjust your PAYE tax code. 

If you’re after capital gains deferral relief, you can claim this via your tax return as well. To receive loss relief, make sure you fill out the SA106 form and accurately detail any unlisted shares and securities. 

The Bottom Line 

Hopefully, we have clarified everything that you, as an investor, might want to know about the income tax relief and other tax incentives offered by the Enterprise Investment Scheme. 

Those EIS tax benefits certainly help to maximise any gains and minimise the losses when supporting a smaller UK business. If the investment pays off, you stand to profit from both the gains and the tax you avoid. Should it fail, your losses are offset against tax as well.

However, the risks should not be ignored. Always perform due diligence on any potential EIS investment opportunity and get as much investment and tax advice as possible before making a decision. 

The UK government offers these incentives because previously, these types of investments were deemed too risky, and therefore, investors avoided making them. A few tax incentives do not make that risk disappear.

EIS Income Tax Relief FAQs

How does a company qualify for the Enterprise Investment Scheme?

The EIS investment scheme aims to help early-stage companies that are considered risky investments for investors. There are strict criteria these companies must meet to become eligible for help from the EIS fund. 

They cannot be listed on stock exchanges and must have no more than 250 full-time employees. Additionally, they cannot have more than £15 million in gross assets. 

How do I qualify as an EIS investor?

You will qualify if you’re a high-value individual who is not connected in any way to the company you’re investing in and does not hold more than 30% of the company’s share capital. The other requirement is that you pay upfront and in cash for those shares, which must be full-risk ordinary shares. 

Who should become an EIS investor?

We believe the EIS is best suited to shrewd investors with plenty of investors with plenty of investment experience. If you’re new to the world of investments, we recommend pursuing safer opportunities until you become more experienced. 

What is the maximum I can invest to qualify for EIS tax relief?

The maximum you can invest and claim EIS tax relief on is £1 million annually. The exception is if you invest in a knowledge-intensive company. You can invest up to £2 million into a company that qualifies as a KIC. 

You can still invest more, but anything above those limits will not qualify for income tax relief or any other tax benefits. 

What happens if I sell my shares before the three-year holding threshold is met?

Simply put, selling your shares before you’ve met the three-year threshold will prohibit you from your EIS tax relief. Any tax relief claimed will have to be paid back. When selling the shares, you’ll also lose the opportunity to claim a capital gains deferral or the benefit of CGT-free gains. 

Will I still receive loss relief if the company goes bankrupt?

Yes, any loss on your investment, even if the company has gone bankrupt, is claimable via loss relief. It is offset against your income tax liabilities or any forthcoming capital gains tax. Either should greatly reduce your overall losses, although it will not cover them all. 

How does the Enterprise Investment Scheme help the UK economy?

The EIS and similar venture capital schemes are initiatives designed to boost the UK economy. By encouraging investment in young UK companies, they help the economy by increasing production and creating employment. 

Are there other venture capital schemes alongside the EIS?

Yes. You could consider the Seed Enterprise Investment Scheme (SEIS) or investing in a Venture Capital Trust. SEIS is a similar government-run initiative to EIS, although it represents an even riskier investment. 

The SEIS is designed to generate investment for UK start-ups that have been trading for less than two years. To incentivise that added risk, investors receive 50% income tax relief for up to £200,000 invested in a year. The initiative also offers capital gains deferral relief and CGT-free gains, while investors also benefit from loss and inheritance relief.